Re: 4 ways to lose, only 1 way to win

Enjoyed reading your "4 ways to lose..." message.  I have made significant
$$ selling "naked" (not owning the underlyinq equity) Put options on beat-up
stocks, such as TYC, EP, ELN, PVN, PLMD and others, during the last 2 years
of this bear market.  I am a value buyer and a contrarian bullish investor.
For example, during June 2002, when Tyco (TYC) quickly went down to the $7
range and I was significantly "underwater" with paper losses on TYC's Put
options, I sold 40 contracts of January 2004 $5 Puts on TYC for $2.00 per
contract. Being that TYC is now over $20 a share, these Put contracts shall
expire worthless.  The key to being successfully in my strategy of making $$
from the Put premiums on
options has been maintaining the discipline of allocation in addition to
controlling to controlling your emotions.

Generally, when I take a position in an option or an equity, it is an
initial position of a possible 3 other positions that I
may subsequently take in the equity and/or option of a stock.  At a minimum,
each subsequent options position has to
have a 20% or greater price difference to my previous price position in that
option.  With volative or high beta stocks,
like TYC, I have usually waited until there was at least 40% - 50% price
difference.  I recommend this website for those
who also may consider themselves to be a contrarian investor:
http://www.schaeffersresearch.com/




"Rumery" <[EMAIL PROTECTED]> wrote in message
news:[EMAIL PROTECTED]
> The most popular way to trade options, is to buy them.  The
>  reason for doing so is always the same...your risk is
>  limited.  But, a closer look into buying options may not
>  hold as much promise as many think.
>
> Options hold one of the few guarantees in trading.  The
>  passage of time.  One key ingredient to option pricing is
>  time.  And I guarantee (oops, there is that word again),
>  that time, no matter what anyone says, will pass.  Because
>  of this one constant, there is also another guarantee that
>  is associated with options.  All extrinsic value contained
>  in the price of options will decay to exactly 0.
>
> Most of the time, option buyers are not buying intrinsic
>  value, they are buying time.  And because this is a major
>  ingredient to option pricing, this creates a huge hurdle
>  to overcome...most don't.  Buying time creates a situation
>  where there are four ways to lose from buying options, and
>  only one way to win.
>
> 1.   If the underlying market remains the same at
>  expiration, all time value decays to zero and you lose.
> 2.  If the underlying market goes against the option,
>  intrinsic value (if any) will decrease AND all time value
>  will go to exactly zero.
> 3.  If the underlying market goes in your direction, but
>  not enough to cover the amount of time value associated
>  with the price when you bought the option, you will lose.
> 4.  If the underlying market moves in favor of the option,
>  and more then the amount of time value paid, but only
>  after the option already expired, you lose.
>
> In other words, you have to be right with the direction,
>  within a certain period of time and the degree that the
>  market moves in the right direction.  You have to be right
>  on a lot of things in order for you to make money.
>
> Of course, the draw to this is that your profit potential
>  is "unlimted".  Having talked to thousands of traders, I
>  have yet to find one that has actually held onto an option
>  for that "unlimited profit"!
>
> The winning way?  The underlying market has to move in the
>  right direction, in the right amount of time, more than
>  the time value associated with the option for the option
>  buyer to make money.  And, let me tell you, if you are
>  that good, you don't need options to make money.
>
> This, of course, is based on holding the option until
>  expiration.  You can get rid of an option early, during a
>  spike in volatility that will actually increase the time
>  value of an option dramatically, but if you want any
>  chance of profiting, you better have a plan to do just
>  that.
>
> Bottom line, you must look at two factors.  Winning % and
>  win/loss ratio.  If you have a situation where you have
>  50% winners and a 1:1 win/loss ratio (your wins are the
>  same size as your losses), you will only break even.
>  Since between 70% and 90% of all options expire worthless
>  (depending on what statistics you are looking at and the
>  type of options...i.e. in the money, at the money, out of
>  the money), it is a difficult thing to win 50% of the time
>  buying options.  But, if you can pull it off, this means
>  that you have to see your option MORE THAN DOUBLE in price
>  in order for you to just breakeven.
>
> Options are much like Algebra.  What is done with one side,
>  must be offset on the other.  This means that if there are
>  4 ways to lose buying options, then there are 4 ways to
>  WIN selling options.  This means that if there is only 1
>  way to win buying options, there is only one way to lose
>  selling options.  (Again, based on holding through
>  expiration for purposes of this article).
>
> But, that doesn't mean I recommend everyone going out and
>  starting to sell options.  Remember that one major draw to
>  buying as opposed to selling.  Your risk is limited and
>  your profit potential is "unlimited".  Well, what exists
>  on one side is offset on the other.  If you sell an
>  option, your profit potential is limited and your risk is
>  theoretically "unlimited".  Those risks MUST be properly
>  dealt with, otherwise you will see one loss wipe out 70% -
>  90% winners.
>
> Many traders who come to realize that buying options is a
>  very, very difficult trading task, do not properly address
>  the risk when the begin to sell options.  The most common
>  risk strategy used when selling options is the use of
>  stops.  In other words, traders will sell an option for
>  say, $1.00 and then put a stop to get out if the option
>  reaches $2.00.  This is one of the worst ways to address
>  risk in option selling.
>
> Obviously, since the one constant in options is the passage
>  of time, the best options to sell are ones that are
>  COMPLETELY TIME.  In other words, out of the money
>  options.  Let's say that $1.00 you brought in on the
>  option was based on a 50.00 strike call when the market is
>  trading at 47.00.  You sold a call option that is $3.00
>  out of the money.  The very next day, the market spikes
>  quickly to 48.50 and the price of the option trades at
>  $2.20.  You got stopped out (probably with slippage) for a
>  loss.  But how much intrinsic value was associated with
>  that option?  0.  It was still ALL extrinsic value.  At
>  expiration, the price of the market remains at 48.50 and
>  the value of that option is 0.  You got out at the worst
>  possible time using a stop, and based on panic.
>
> There are several strategies that can be used to better
>  address the risk associated with selling options.  A few
>  suggestions will be posted sometime next week.  This
>  article cannot possibly address everything that needs to
>  be addressed when considering options.  But, for now, I
>  hope this gives you some food for thought.
>
> In closing, if you thought any of this information was
>  valuable, please, by no means contact me...there are
>  certain people on this newsgroup that might think I
>  am "spamming" the group...and we wouldn't want to ruffle
>  their feathers, now would we.
>
> [EMAIL PROTECTED]
>
>